Those of us who work in the benefits area understand that the distinction between employee and independent contractor is an important one, but one in which the determination is not always clear. In many cases, the IRS takes the position that a particular worker is an employee, rather than an independent contractor, thereby requiring the employer to pay its share of employment taxes and to withhold income taxes. The individual is also then often eligible for various employee benefits.
In a recent Tax Court decision, the positions of the parties were reversed, with a moonlighting police officer was claiming that he was an employee and the IRS claiming that the moonlighting jobs constituted self-employment so that the fees were subject to self-employment tax.
The individual was a police officer who provided security services during off duty hours. The businesses for which the officer performed the duties did not treat the officer as an employee. The police officer did not pay self-employment taxes on the fees received and instead claimed that he was an employee of the businesses and therefore not liable for self-employment taxes.
The Tax Court considered the same factors that are typically considered in determining whether a worker is an employee or independent contractor, namely, the degree of control exercised by the business over the details of the work, the extent to which the worker invests in the facilities used in the work, the opportunity of the worker for profit and loss, whether the business has the right to discharge the worker, whether the work is part of the business’s regular business, the permanency of the relationship, and the relationship the parties believe they are creating. The Tax Court considered each of these seven factors and concluded that some favored independent contractor status and some favored employee status. The court then weighed the factors, giving greatest weight to the right to control.
In a Tax Court decision such as this, the taxpayer generally has the burden of proving that the IRS’s determination is incorrect. That burden was on the police officer in this case. In other words, the IRS’s determination that the officer was not an employee was presumed to be correct.
After weighing the factors, the Tax Court concluded that the police officer had failed to meet his burden of proof to establish his status as an employee. Therefore, the IRS’ position was upheld.
Although the Tax Court opinion does not say this, it is certainly possible that if the police officer had been claiming independent contractor status and the IRS had disagreed, the Tax Court may well have upheld the IRS’s position in that situation too. Because the elements are considered in an independent contractor/employee dispute can often support either conclusion, the burden of proof can be the deciding factor.